Table Being Set for Turn-Around Tuesday

Often it seems that when the currency markets are trending, Friday is a trend day in the sense that the dollar moves in the direction of the underlying trend.  Monday then often sees some follow through in that same direction but runs out of steam and Tuesday reverses the near-term trend.  This pattern seems to be playing itself out again now.  

The markets seemed to be looking into the abyss.  Rumors of an imminent and un-managed Greek default.  A German hawk on the ECB resigned, perhaps, some feared, leaving the doves in control.  French banks and Italy are rumored to be facing a imminent downgrade.

The euro has collapsed from almost $1.4550 on August 29 to $1.3495 earlier today Monday, September 12.  Only two major currencies have done worse in this period.  The Swiss franc has  fallen 7.8%, the Swedish krona has depreciated 6.4% and the euro, in this period has lost 6.2% by late in today's session.  The two strongest currencies against the dollar have been the Japanese yen, losing only 0.6% against the greenback and the Canadian dollar, which tends to out perform on the crosses in a strong US dollar environment lost a little less than 2%.  

The world appeared to be rushing headlong into the abyss and this seemed to be, generally speaking, the key driver lifting the greenback.  However, the world seems poised to step away from the abyss.

The Greek government adopted new austerity measures to fill the deficit gap.  A cut in public sector wages and a new property tax will not do anything good for growth, but it will likely keep the wolves from the troika (ECB/IMF/EU) at bay for a bit.  Italy is reportedly in talks with China's sovereign wealth fund about buying its bonds.  

Italy and France were placed on credit watch three months ago and that is usually around the time its takes for the rating agencies to finish their analysis.  While downgrades are indeed possible (even likely), the risk is that there is a "sell the rumor, buy the fact" type of activity, leading to a counter-intuitive rally when the decision is announced.  

If this general view is right that a correction/consolidative phase is indeed at hand, the euro could recover toward $1.3700-50.  Sterling may move back toward $1.59.  Look for the euro to recover against sterling.  Currently it is near GBP0.8580 and there is potential during this phase to see GBP0.8650-80.   The Swedish krona may also recover, but risk/money management is more difficult as it is not immediately clear where a stop out to be placed on a short dollar position.  

Alternatively, depending on one's risk appetite, trading prowess and underlying view, may be better served not playing for Turn-Around Tuesday and instead wait for a dollar pullback to get with the underlying trend and renewed tensions in Europe.  The crisis is not resolved in any shape or form, it is just that the world is not headed for the abyss...so fast.